Category Archives: Curiouser and Curiouser

This Is No Fairy Tale

Close on the heels of the Copper Mountain decision (the “fairy tale” case) comes another remarkable lead plaintiff/lead counsel order. In the Terayon securities class action, Judge Marilyn Hall Patel of the N.D. of Cal. has both disqualified two of the lead plaintiffs and found it “probable” that lead counsel must also be removed.

Terayon Communication Systems, Inc. is a Santa Clara-based maker of cable modem equipment. The securities class action against the company, initially filed in April 2000, is based on allegedly misleading statements concerning the company’s ability to obtain certification for its technology.

Judge Patel originally appointed Cardinal Investment Co. and Marshall Payne (an employee of Cardinal) as two of the lead plaintiffs in the case. It came out in discovery, however, that Cardinal and Payne were significant short sellers of Terayon stock (hundreds of thousands of shares) and in early 2000 had begun a campaign to flood the market with negative information about the company. The campaign included phone calls to the certification entity, starting Internet chat room rumors, letters to the SEC, and contacts with financial reporters.

Moreover, Cardinal was apparently working closely with plaintiffs’ counsel (later lead counsel for the class) during this period. Starting in February 2000, Internet website postings encouraged parties to contact plaintiffs’ counsel about a proposed lawsuit against Terayon. According to Judge Patel, “the class period in the original complaint, i.e. the first day on which plaintiffs claim they were damaged, was February 9, 2000 the same day these Internet postings appeared. Defendants assert that these web postings were part of plaintiffs’ alleged scheme to drive the price of the stock down.”

On April 11, 2000, the same day as a Terayon earnings conference call during which the company’s executives were sharply criticized by short sellers using phony names, an investor plaintiff signed a sworn statement authorizing the filing of a complaint that closely tracked the language of Cardinal’s letters to the SEC. It was not until the next day, however, that the price of Terayon’s stock dropped significantly. The complaint was filed on April 13.

Following the revelation of these facts, defendants moved to have Cardinal and Payne removed as lead plaintiffs. Judge Patel has agreed and more.

The court found “[w]hile some short sales may not, in and of themselves render a lead plaintiff’s claims atypical, a pattern of affirmatively engaging in campaigns devised to lower the price of the stock in question certainly contains within it the seeds of discord between lead plaintiffs and the remaining plaintiffs.” Accordingly, the court removed Cardinal and Payne as lead plaintiffs (and also noted that they “appear to have participated, if not perpetrated, a fraud of their own on the market” and could be subject to claims by their fellow shareholders).

As for lead counsel, the court expressed concern over lead counsel’s pre-suit involvement with Cardinal and its apparent efforts “to mislead the court as to the scope and nature of lead plaintiffs’ holdings in Terayon stock” as part of the lead plaintiff selection process. Based on this course of events, the court wondered “whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon’s stock price” and invited a motion on whether lead counsel had waived privilege. In any event, the court found “it is probable that there is a conflict not only between lead plaintiffs and the class but also between lead counsel and the remainder of the class.” Lead counsel was asked to provide a written response to a number of questions and defendants were given leave to take further discovery on the issue.

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Fairy Tales, Lead Plaintiffs, And The PSLRA

If the judge ain’t happy, ain’t nobody happy. Proving that axiom correct, Judge Vaughn Walker of the N.D. of Cal. issued a fairly amazing order last week in the Copper Mountain securities litigation, expressing displeasure with both plaintiffs and the 9th Circuit over the lead plaintiff/lead counsel selection process in that case.

The PSLRA provides that the “presumptively most adequate lead plaintiff” in a securities class action is the movant who “has the largest financial interest in the relief sought by the class” and “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” To summarize the process, the judge’s task is to determine which plaintiff has the largest financial interest, evaluate whether that plaintiff meets the adequacy and typicality tests of Rule 23(a), and, if that plaintiff meets the requirements, declare that plaintiff the presumptive lead plaintiff (a presumption that may then be rebutted by other plaintiffs). The court must also approve the lead plaintiff’s choice of counsel.

Three years ago, Judge Walker determined that he would not name the lead plaintiff movant in the Copper Mountain case with the largest financial interest as lead plaintiff because that candidate, known as the CMI Group, failed to demonstrate that it was an adequate lead plaintiff. Judge Walker based his decision on the CMI Group’s failure to negotiate a “competitive” fee arrangement with proposed lead counsel and named a different movant as lead plaintiff. See In re Quintus Sec. Litig., 201 F.R.D. 475 (N.D. Cal. 2001) and In re Quintus Sec. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001).

The CMI Group petitioned the Ninth Circuit for a writ of mandamus. In In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), the court overruled Judge Walker’s decision. The panel, in an opinion written by Judge Alex Kozinski, found that the lower court had failed to follow the statutory language of the PSLRA in appointing the lead plaintiff. In particular, the court found that “a straightforward application of the statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” Moreover, the lead plaintiff process “is not a beauty contest” and information about fee arrangements “is relevant only to determine whether the presumptive lead plaintiff’s choice of counsel is so irrational, or so tainted by self-dealing or conflict of interest, as to cast genuine or serious doubt on that plaintiff’s willingness or ability to perform the functions of lead plaintiff.” Accordingly, the Ninth Circuit vacated the lower court’s order and instructed the lower court to proceed with the CMI Group as the presumptive lead plaintiff.

On remand, however, the CMI Group apparently decided to no longer seek lead plaintiff status (or, as Judge Walker puts it, “vanished – fled the scene – gone south – maybe vaporized”). In his order, Judge Walker compares the situation to a “heroic prince” turning into a “frog” and is incredulous over the course of events:

“By vindicating their ‘right’ to be the presumptive lead plaintiffs through the extraordinary remedy of mandamus (and establishing circuit precedent of no little value to their lawyers), the CMI group might seem to possess a tenacity and determination seldom seen on the battlegrounds of federal litigation. But what might seem apparently is not. Could there have been some motivation other than vindicating the interests of defrauded investors behind the mandamus proceedings? Could it be that the Ninth Circuit panel, perceiving the black letter of the PSLRA, was actually reading a fairy tale?”

Also not surprisingly, Judge Walker appears to believe that the CMI Group’s decision vindicates his earlier order. Noting that “Cavanaugh would seem to establish that the largest stakeholder’s selection of counsel must be approved unless that selection is either mad or crooked,” the court finds that the opinion converts the PSLRA into “a straightjacket against judicial measures to ensure that [securities class actions] genuinely benefit investors, not lawyers.” In the absence of the CMI Group, Judge Walker ends up simply reappointing the earlier lead plaintiff to the position. “The moral of the story,” the court concludes, “will be left to you, dear readers.”

The Recorder has an article (via – free regist. req’d) on the case in today’s edition. Judge Walker’s order is not yet available online.

Addition: The opinion is now on Westlaw – In re Copper Mountain Sec. Litig., 2004 WL 369859 (N.D. Cal. Feb. 10, 2004).

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You’re No Martha

According to a Reuters report, plaintiffs’ counsel in the securities class action pending against Parmalat SpA in the S.D.N.Y. has sought a court order preventing the destruction of documents by the company and its advisors. District Judge Lewis Kaplan was apparently unimpressed with the request. Noting that destruction of documents is a criminal offense and any order would be redundant, the judge suggested at a hearing on Friday that the request for an order was done mainly for the benefit of the media. “If anyone wants to file papers on this, God bless them,” Judge Kaplan said. “But don’t waste my time.”

Quote of note: In response to plaintiffs’ counsel’s description of the Parmalat case as “unusually high-profile,” Judge Kaplan responded – “Not by the standards of this district. There is nobody named Martha in this case.”

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Wanted: Employees With A Story To Tell

The State Treasury and Attorney General of Connecticut are leading a securities class action against JDS Uniphase Corp. (Nasdaq: JDSU), a San Jose-based fiber-optic components maker. In an interesting development, Reuters reports that the Attorney General has taken out an advertisement in the Ottawa Citizen newspaper (JDS Uniphase used to have part of its headquarters in Ottawa and still has 580 employees there) discussing the case and urging JDS Uniphase employees to dislcose what they know about the company even if they’ve signed confidentiality agreements.

Quote of note: “‘Some employees may have signed confidentiality agreements, but the court agreed with the Treasurer’s Office and the Attorney General that employees cannot be prevented from telling what they know,’ the advertisement said.”

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One Way To Get Rid Of A Case

Want the plaintiffs to voluntarily dismiss their securities class action? All you have to do is get the SEC to approve your “unusual” accounting practices. According to an article in the Boston Globe, PolyMedica Inc. (Nasdaq: PLMD – a maker of diabetes test kits) has convinced the SEC to approve its use of a “1993 accounting rule to record marketing costs as an asset on its balance sheet.” This accounting treatment was the subject of the securities class actions pending against the company, which may now be dropped.

Quote of note: “PolyMedica argued it operates like an insurance company because customers sign up immediately upon viewing an ad. The company is well known for the blood-glucose test kits it sells via television ads under its Liberty brand name. The company said the SEC has decided that ‘PolyMedica should continue to capitalize its direct response advertising costs related to the acquisition of new customers, rather than expensing such costs as incurred.'”

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The Battle Over Greenfield’s Estate

Harvey Greenfield was a plaintiffs’ securities class action lawyer who passed away in 2002. A proud alumnus of Harvard Law School, Greenfield indicated to people that he planned to leave the bulk of his $35 million estate to the school. But a year after Greenfield’s death, his will cannot be located and there is an ongoing battle between Harvard and his sole living heir over who will receive the money. The August 20, 2003 edition of the New York Law Journal contains an article (via – free registration required) discussing Greenfield (including his famously abrasive dealings with other lawyers) and the legal contest over his estate.

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“Bounty On Directors and Officers”

According to the Recorder (via, a prominent securities class action plaintiffs’ attorney stated at a recent ABA seminar that “he has been offered 50 percent of any judgment that comes directly from the pocketbooks of individual directors and officers.” Moreover, his institutional clients are committed to defending this type of fee arrangement in court.

Note, however, that this is not really a new revelation. An article in the January 2003 issue of the Corporate Legal Times (only available online via Westlaw or LexisNexis) discussed the use of premium fee arrangements to target the personal assets of alleged corporate wrongdoers under the sub-headline “Institutional Investors Place a Bounty on Directors and Officers.” Just something else to keep corporate executives up at night.

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Winona, Martha & The Securities Fairy

Fortune magazine has a short, often funny, and very effective interview with former SEC commissioner Joseph Grundfest. Among other things, Grundfest has a two-word explanation for the recent spate of corporate scandals: Winona Ryder. (Thanks to the Securities Law Beacon for the link.)

Quote of note:

Interviewer: “You’ve argued historically the class-action system has compensated investors – but hasn’t deterred future misbehavior. Why?”

Grundfest: “I’m not suggesting that it has no deterrent effect. It’s just weak compared with the criminal and the SEC enforcement mechanisms. The reason is that only 0.5% of the settlements in the 15 largest settlements came out of the pockets of the wrongdoer.”

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Double Down On Winnick

Gary Winnick, the former Global Crossing executive, was not amused to find that his likeness appears on the “Shareholders’ Most Wanted” playing cards and sent a cease-and-desist letter directly to the distributers. The distributers, however, claim in this Reuters article that the letter was inappropriate because they are plaintiffs in the Global Crossing securities class action.

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WSJ Profiles Judge Pollack

In the wake of his recent opinions, Judge Pollack of the S.D.N.Y. is profiled in today’s Wall Street Journal (suscrip. required).

Quote of note: “Judge Pollack was just as brassy in his days as a plaintiffs’ lawyer, said Michael Mukasey, chief judge of the Southern District where Judge Pollack sits. As Judge Mukasey tells the story, one day when taking a deposition from Spyros Skouras, then head of the 20th Century Fox movie studio, in Mr. Skouras’s wood- paneled office, Mr. Pollack calmly selected a cigar from a humidor, bit off the end and lit up. Visibly reddening, Mr. Skouras said: ‘Mr. Pollack, I don’t remember offering you a cigar.’ Mr. Pollack replied, ‘Those aren’t your cigars, those are the stockholders’ cigars.'”

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